I'm afraid I will have to disagree with the outcome of Kiwi Saver in that article. This one particularly:
"A number of commentators have said KiwiSaver is not a good savings vehicle but, simply put, they are wrong. Many overseas countries have looked at our system and endeavoured to try to replicate it in some way or another over the past few years. I know for a fact Ireland are interested in how it works."
I would be interested to know which countries would regard NZ's KS so great? Certainly not in the US and definitely not in Canada. The key distinction about KS (when compared to other employer contribution plans overseas) is how IRD taxes individuals on the fund's gains. The approach has been taxing the gains at the start and not taxing the gains at the end at retirement. When you take taxation out, this leaves less 'compound' returns. The key advantage to US's 401K plans and Canada's RRSP is ALL the contributions grow 100% tax free. In addition the amount of contributions is a direct deduction of the person's taxable income. When retirement comes, YOU CHOOSE how much income and tax you would like to have in a year when you make disbursements ; ie structure so you're retirement income is taxed at the low tax bracket. In KS, the higher the income, the higher YOUR KS returns are taxed. If there is no disincentive than that, then I can understand why the details are rarely spoken about in NZ or why financial advisors don't disclose the full tax workings of the funds and from the client's point of view. But I suppose I should not be so critical to NZ. KS was a start of a system that most OECD nations already had decades before. In Canada, the individual has 3 sources of pension. OAS which is like our NZ Super. CCP which everyone employed pays (there's no NZ equivalent). RRSP which would be comparable to our KS. Also for many professions in Canada they have their own investment retirement plan - such as the Teachers where they pay into a Teacher's Retirement scheme. End result a teacher can retire with 4 income streams ; OAS, CPP, RRSP, & Teacher Pension income.
Putting these key advantage aside, here's my thoughts on the following from the article (one's with my concerns):
What are the stand-out benefits of KiwiSaver today?
- If you put 3% of your salary or wages in, your employer, in most circumstances (more to come on this) have to match that. No ifs or buts. If they do not, they are breaking the law.
- seriously putting 6% of the individuals income is a joke and it won't get you to riches for the vast majority of people in KS. In Canada individuals can max at out 18% and these contributions are a direct credit off the taxable income.
- The Government will give you an extra $521 dollars a year every year (until you reach retirement age) if you put in a minimum of $20 dollars a week. Think of it as a 50% return on those contributions every year!
- the gov't and financials advisors call this an incentive to join KS, to me I call this a bribe.
- For those who are first homebuyers you can use your KiwiSaver funds (excluding the $1,000 kick start if you were lucky to get that at the time) to go towards your first home. It is one of the quickest ways you can build up a deposit because it is not only your contributions but your matching employer and government contributions that can be used to get there quicker.
- in Canada the Home Buyer's Plan allows the individual to withdraw up to $35K from their RRSP. Keep in mind, contributions to the RRSP reduce the person's taxable income, and is compounded in the investment tax free (the notion that at retirement, the CGT applies however, $35K is withdrawn with no tax penalty). This is very different to KS or PIE funds where gains are taxed annually at RWT.
- The government has recently reviewed KiwiSaver default providers and we have got one of the lowest range of investment management fees in the world. This is even more remarkable given we only have around $62 billion of funds compared to say Australia that has $3 trillion of funds under management and their fees are higher than ours. So big tick there.
- the investment mix whether default, aggressive, conservative, is all a bunch of rubbish. You don't relegate the investment risk based on the % proportion in fixed term investments (bonds, term deposits, etc) as a ratio to the equity investment. Instead, the investment make up should be based on the individual's age and with a slight consideration of when a stock market has crashed or not. Those younger should take on more risk and go all in 100% equity. Those near retirement age, go the other way around and have a small % in equities. Of course if you're like Warren Buffet and all the famous gurus - they say fixed income investments are a waste of time one should staying invested in equities all the time.
The article goes on asking why some don't join KS. I say the key reason is they may be people who are already wealthy enough and can invest directly with their own savings... ie such as buying NZ houses - leverage it through the bank kind of deal that you can't do in KS.
As a friend once told me, "Kiwi Saver is only for people who can't manage their own savings and invest... but the people that know how to get rich, don't do so with KS".